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Microsoft loses showdown in Houston

By Byron Acohido, USA Today

May 1, 2008 Update: SimDesk mentioned in the story below has gone out of business

HOUSTON — The people who run this city recently heard a familiar pitch from Microsoft: Sign up for a multiyear, $12 million software licensing plan or face an audit exposing the city's use of software it hadn't paid for.

Microsoft warned that the city could be slapped with stiff fines for using any Microsoft software for which it could not produce receipts.

Scores of other businesses and public agencies, facing a similar dilemma, have agreed to the new licensing deals — a linchpin of Microsoft's growth strategy.

Not Houston.

The nation's fourth-largest city rebuffed the offer and has embraced an obscure competitor called SimDesk. SimDesk delivers software over the Internet at a fraction of the cost of Microsoft's Office, a software suite used on 94% of America's office personal computers. Houston is giving SimDesk to tens of thousands of residents and businesses, free. And it has begun using SimDesk as an Office substitute on at least half the city's 13,000 PCs. (Comparison: SimDesk vs. Office)

Houston's moves could have a profound impact not only on Microsoft, but on the computing industry. If SimDesk proves to be a cheaper, workable Office alternative here, it could help achieve what Microsoft's rivals and antitrust busters could not: puncture Microsoft's monopoly and give tech buyers more choices.

"It's very cool technology," says retired software analyst Peter Lowber, who led the Gartner research firm's review of SimDesk last fall. "It works."

SimDesk isn't perfect. It lacks many sophisticated features of Office, such as the ability to customize spreadsheets, do slide presentations or work databases. The glaring shortfall: It has no track record, making it risky for companies hesitant to bet on unproven technology.

Yet, right behind Houston, Chicago, the nation's No. 3 city, recently launched a pilot program putting SimDesk on 150 PCs in 18 community centers. And about 50 public agencies in 27 states are checking out the technology.

To get this far, SimDesk weathered one of the messiest political firestorms Houston has seen in years. Over the course of eight months, SimDesk would be taken to the brink several times. A city official's career would implode and a big city mayor's vision would be fulfilled.

In the end, Microsoft would land in an unusual position: on the defensive. And big tech buyers would have a test to watch. If Houston can make SimDesk work, could they? "I see this thing exploding," says Michael Chernoff, a Houston city computer analyst and tech project manager.

It took an improbable chain of events to position Houston and SimDesk to tilt at Microsoft's windmill. A chance encounter drew together entrepreneur Ray Davis, fast-talking city official Denny Piper, now awaiting trial on unrelated embezzlement charges, and Houston Mayor Lee P. Brown, who was looking to leave a legacy.

What began as Brown's goal to use SimDesk as an affordable way to give poor residents access to basic computer functions broadened into a plan to use SimDesk as a cheaper alternative on some city PCs, too.

Davis, 47, a Houston-based tech entrepreneur, set out in 1999 to make common software — word processing, spreadsheets — available affordably over the Web. Not an original idea. Tech giants from Microsoft, with its .Net strategy, to IBM and Sun Microsystems are working on the same thing.

Davis raised $12 million to fund a small band of developers, and SimDesk was born a year later. Its breakthrough was in finding a way to control millions of simultaneous PC users via a single computer server. Its potential attracted Robert Knowling, who had recently resigned as CEO from struggling Covad Communications. He invested in Davis' start-up, then named Internet Access Technologies. He saw it as a .Net precursor and became CEO to try to sell SimDesk to America Online to help AOL battle Microsoft. Davis also brought in business consultant Wendy Haig, 46, ex-daughter-in-law of former secretary of state Alexander Haig.

But the dot-com collapse ran deep, and cash for acquiring promising technology was disappearing. Negotiations with AOL failed, as did talks with Yahoo, AT&T and others. SimDesk's options were thinning.

On a flight leaving Houston, a discouraged Haig found herself, by coincidence, seated next to Piper. Then 39, Piper had hit Houston the year before like a West Texas tornado. The new chief information officer had wrested control of a $100 million tech budget, consolidated 14 e-mail systems and revamped the city's Web page into an award winner.

Haig showed Piper a SimDesk news column and jokingly chided him for not knowing about technology in his backyard. They exchanged business cards.

Bullied by Microsoft?

Piper had other things on his mind. Awaiting him in Houston was a new contract Microsoft wanted him to sign. The software giant had recently announced a plan, referred to as "Software Assurance," to get more companies and agencies to upgrade to Office and other software every two to three years instead of a more typical four years or more. Almost 50% of companies upgrade software every four years or more vs. 23% every two years, said a 2002 survey of 1,500 companies by The Yankee Group research firm.

Microsoft set fall 2001 as a deadline for customers to sign up. Those who did would pay $239 to $380 per copy for Office XP, the latest version.

Those who passed would pay $479 a copy when they did upgrade.

Microsoft says the plan cuts software costs and improves service. That's especially true for companies that upgrade every three years — typically bigger companies. But research firms Gartner and Yankee say the plan will raise costs for companies that upgrade less often, usually medium and smaller ones.

With no viable Office alternatives, some companies, like the 25-member Clendon Feeney law firm in Wellington, New Zealand, felt bullied.

"Microsoft gets nice, steady cash flow from their big users, and then they get the real cherry on the cake when all the businesses who choose not to upgrade now have to go out and buy at full price later," says managing partner Craig Horrocks.

Microsoft also sent letters to 500 school districts in 30 states giving them 60 days to produce receipts accounting for every copy of Microsoft software being used. Failure to do so could result in an audit and penalties, the letters warned. In the same envelope came a sales brochure about the new licenses.

Microsoft says it prohibits audit threats and did not consider such letters threats. Sales reps are encouraged to make customers aware of options, the company says. But 6% of 1,400 worldwide corporations surveyed in 2002 said they had been threatened with an audit if they didn't sign up for a new license, says researchers Yankee and Sunbelt Software. Another 26% said Microsoft alluded to the possibility.

Customers proved so recalcitrant that Microsoft was forced to push back the sign-up deadline three times, finally to August 2002, after which quarterly revenue shot up a robust 26% from the year before as customers signed up. Microsoft "really damaged its relationships with a lot of customers who perceived this as a money grab," says Paul DeGroot, software analyst at research firm Directions On Microsoft.

Houston finds SimDesk

Houston was one of the unenthused customers. Office 97 and Office 2000 were in wide use on city PCs. To upgrade to Office XP would mean acquiring higher-powered PCs, too. "We'd be paying for something we wouldn't be able to use," Piper says.

So Piper decided to follow up his meeting with Haig. He checked out SimDesk and was impressed. He arranged a meeting between SimDesk and Mayor Brown. Piper's idea: test SimDesk on public PCs in libraries. If it worked, the city could pay for it by using SimDesk on some city PCs, too.

Piper also theorized that by storing files on SimDesk's server, instead of on individual PCs, city workers could get to them anywhere via the Internet. The city wouldn't need new PCs and could slash spending for Office. Piper estimated savings of $1.6 million the first year and $7.1 million a year indefinitely if SimDesk replaced Office on 50% of city PCs.

Brown latched onto the benefits for low-income citizens, small businesses and civic groups. "My interest has always been to bridge the digital divide in a way that pays for itself," says Brown, a former Clinton administration drug czar.

A week later, the first copies of SimDesk were loaded on 470 computers in 37 branches of the Houston library. As long as SimDesk appeared designated for low-income users, and the city was experimenting with it for free, SimDesk posed no threat to Microsoft.

SimDesk wows users

That changed when Piper began to move ahead with plans to use SimDesk on city PCs.

When Piper brought the SimDesk proposal — a three-year, $5 million contract for the library PCs and 50% of the city PCs — to the city council in May 2002, Councilman Bruce Tatro, a frequent Brown critic and former accountant, opened fire. He contended cheaper alternatives were available and expressed doubt workers could use SimDesk to do city work.

"We had a dot-net start-up company with no track record, no customers, providing us with an unproven product," says Tatro. "The risk for the city was huge. We were being asked to beta test untried software."

Tatro's argument might have swayed the majority, had SimDesk flopped. Instead, during nine months of the pilot program, more than 30,000 users had written and stored resumes, school papers, legal statements, poetry and other files on the SimDesk server. They couldn't do complex data sorting or many other chores Office does well. Even so, lines formed at the library's SimDesk terminals. Civic leaders rallied behind it. "SimDesk lowers the barriers for the low-income community," says Brian Stevens, executive director of The Telecom Opportunity Institute, a non-profit that guides at-risk youth.

Despite Tatro's criticism, a council subcommittee voted 6 to 5 to put the contract before the full council.

Microsoft says it was misled

That got Microsoft's attention. Microsoft sales rep John Haines and his manager, Andrew Wise, traveled to Houston from their Austin offices. They asked council members to delay voting on the SimDesk contract for 18 months, council members say.

Haines and Wise said Microsoft was unfairly left out of the loop on the contract bidding process, initiated shortly after the library test got underway.

Haines complained to Tatro and other council members, they say, that Piper misled him by not spelling out that the city was looking for an Office replacement. Microsoft spokeswoman Stacy Drake, in a recent interview, called the proposal process "controversial and questionable." She would not be more specific. Haines declined interview requests.

City officials say it is a contractor's responsibility to analyze bid requests, which usually don't specify that a product or service will replace something else. More than 20 companies studied the bid request. Six attended a pre-bid conference, city records show. Microsoft was not among them. Only SimDesk submitted a bid. The proposal called for a suite of desktop software for a variety of sites as well as on "up to 15,000 desktop computers."

Piper denies Microsoft's allegations. Some council members, in turn, were upset by Microsoft. "They (Microsoft) took it for granted they had the best software in the world and everybody's just going to buy it," says Councilman Carroll Robinson.

Cicely Wynne, an aide for Councilwoman Annise Parker, who met with Haines and Wise, says the 11th-hour lobbying "was not a smooth move by Microsoft. It was very late in the game, and they were caught with their computers down."

Tatro says he met several times with Haines and Wise, and maintains an arm's-length relationship. "I weigh their input just like I would from any other expert source, " says Tatro. "Microsoft has played no part in my pursuit of terminating this contract. It's just not a good piece of software. It is a bad, bad deal."

Before the final vote, Davis had to refute allegations, submitted anonymously on a now defunct Web site devoted to city politics, that SimDesk stole computer code from another software company, Citrix. Tatro raised the allegation in public council discussions. He backed down after Davis offered to produce Citrix officials to refute the accusation.

On June 5, the council approved the SimDesk contract, 8-7.

Two days later, Piper announced his resignation to take a higher-paying job as chief technology officer for San Diego County. Council members Parker and Ada Williams, who voted for SimDesk because of Piper's assurances that the city would save money, said in interviews they felt duped when he resigned.

But Piper didn't last long in his new job. Shortly after Piper arrived in San Diego, Tatro alleged that he had rigged the bidding to assure a SimDesk win. That triggered an investigation by Houston's Inspector General, who found the allegations groundless. The county District Attorney, in a separate probe, examined Piper's financial records and stumbled into evidence that Piper may have embezzled $200,000 from his previous employer, Reliant Energy. On Dec. 11, Piper was indicted on felony theft charges and jailed. He has since been released on bail and is awaiting trial. He has not entered a plea.

Microsoft, city count software

To replace Piper, Mayor Brown turned to Richard Lewis, a former Houston finance director. The contrast was acute. Piper was the shake-it-up outsider; Lewis the consummate insider.

Microsoft had earlier proposed shifting the city to a three-year, $12 million contract for all Microsoft software, including Office. Soon after the council approved the SimDesk contract, Haines revived the offer. Haines approached Lewis' deputy, Coy Baskin. According to Baskin, Haines pointed out that the Business Software Association, an industry group co-founded by Microsoft, could levy penalties of up to $150,000 for every unlicensed user of any Microsoft product. Baskin says he took that as a friendly reminder. "I don't feel he ever threatened me."

But word spread that Microsoft could audit the city's software use. "It was general knowledge from the department heads on down that Microsoft was putting pressure on the city to try to stop SimDesk," says Chernoff, the Houston tech project manager.

While not an audit, Haines produced data purporting to show the city owed Microsoft $1.1 million for software he said was being used illegally by city workers, Lewis says.

Like many companies and organizations, Houston had haphazardly acquired software over the years. Each city department had several ways to acquire, deploy and track it.

Microsoft's Drake insists that Haines was engaged in a routine "inventory review" unrelated to SimDesk. Such reviews "are really a cooperative process to ensure accuracy and clarity relating to the licensing of our software," she says.

Lewis decided to do his own count of Houston's software. Discrepancies soon cropped up. Microsoft's data showed the public works department to be short 252 Office licenses. But the city's check revealed it had 135 more Office licenses than it needed.

By Microsoft's count, another big department, the library, looked to be short 450 Office licenses. But Houston rounded up documentation covering all of those copies, including 111 donated by Microsoft Chairman Bill Gates' charity foundation.

Houston said it owed Microsoft, at most, $500,000.

Haines responded with two new contracts, both for less than the original $12 million, Lewis says, although neither side will release details.

SimDesk's future is far from certain. Distribution to Houston residents and businesses is planned next month. Chicago is seeking grants to extend SimDesk to libraries and schools. Proposals for similar rollouts exist in Denver and New York.

Brenda Hopkins, operations manager in Houston's finance department, has used SimDesk for several months. She says it was easy to learn and use. "It meets all my needs," she says.

Gartner tech analyst Mark Margevicius sees Houston and Chicago as aberrations. He says big tech buyers won't switch to SimDesk because it is so unproven. Gartner says other fledgling Office rivals, the free OpenOffice and StarOffice, backed by Sun Microsystems, have a better chance against Microsoft.

Davis says he isn't aiming at Office yet. Springing off Houston, he's peddling SimDesk as a low-cost way for cities to spread computing to welfare moms, students, workers and small-business owners. He has raised another $38 million and has enough funding to last the year with no more new contracts. He's engaged computer maker Unysis as a marketing partner. Lou Waters, former CEO of waste giant Browning-Ferris Industries, recently replaced Knowling as SimDesk's CEO. SimDesk now has 100 employees.

Eventually, Davis hopes, SimDesk will draw corporate customers. "We can't afford to go toe-to-toe with Microsoft," says Davis. "So we have to wait until the business comes to us."